Calpers: Twofold impact

Economist Glen Langan told BloggingStocks Thursday Calpers' decision will impact the U.S. economy twofold.

"First, there's the direct impact of Calpers moving money toward commodities, which is bullish. Second, and perhaps more significant, there's the symbolic impact of having a major buy-side institution say it's going to commit more money to commodities. That decision will no-doubt encourage other institutions and money managers to do the same, and put more fire under commodity prices for 2008," Langan said. "That suggests commodities will perform well in 2008, barring a major slowdown in global growth."

Still, Langan is quick to point out the downside to the United States to double-digit commodity price growth, particularly as it relates to energy and raw materials. Rising commodity prices will continue to exert inflationary pressures in the U.S. economy, raising costs for businesses and consumers. Some companies (and individuals) will benefit from the rise, as will institutions who invest in the investment class, but the net effect for the U.S. economy is decidedly negative, he said.

"The U.S. economy is just beginning to see the inflation effect of various commodity price increases, particularly oil, but also corn and wheat. That should add about 1 percentage point to retail inflation," Langan said. "If the commodity bull market continues in 2008, it could add another percentage point to retail inflation. On a practical level, are U.S. consumers' financially prepared for $5 a gallon gasoline, and businesses prepared for raw material costs that increase by, say, another 20-30%? Probably not, which is why policy makers are going to have to prepare potential solutions, should commodity prices reach unacceptable levels."